With the release of the first official discussion paper (dated 10th Nov 09) on pan-India GST rollout, many questions about the GST model have been either answered or clarified the direction of thought adopted by the Empowered Committee (of State Finance Ministers).

The paper makes some key points about the model being proposed –

-a Dual GST model (Central and State) will be adopted,

-for inter-State transactions Integrated GST is proposed,

-a two rate structure will be adopted (lower rate for essentials and standard for general products/services),

One key aspect that Indian firms enterprises will be looking at closely is how inter-State transactions will be taxed in the new regime. Now, even after VAT implementation, such transactions attract CST at 2% rate down from 4% until 2007. As part of VAT and GST implementation, this tax was agreed by Centre and States to be phased out starting April’ 07 at an annual rate cut of 1 % until it is completely abolished in 2010-11. (However, due to general elections and applicable CoC, 2009 rate cut was not carried out with the suggestion that it will totally abolished with GST rollout.)

Now, it particular liability has caused much grief to Indian enterprises in general and their COOs in particular. To escape CST incidence enterprises have been forced to maintain depots in practically every state where goods can be dispatched on consignment and then invoiced for sales. This, in the Indian context, translates to about 25 depots, which due to fragmentation of volumes are small and very basic in configuration. Thus, supply chain networks today are based on tax optimization instead of logistics and operational optimization. With a fair GST model that doesn’t penalize inter-State trade, firms will be able to run their distribution networks with lesser depots and consequently these will be of sizes that justify modernization in terms of infrastructure, systems and skills.

The discussion paper does talk in detail about an innovative variant of GST called Integrated GST for inter-State transactions. Centre would levy IGST which would be CGST plus SGST on such transactions with due provision for stock transfers. The inter-State seller will pay IGST on value addition after adjusting available ITC and will transfer the SGST credit used in payment of IGST to the Centre. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. A Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds. Given the currently substantial State tax evasion under the State export trade category by traders the likelihood of acceptance of IGST by concerned commercial departments is very high.

Though there remains much to be clarified in terms of details, it is very clear that across state trade will no longer be penalized and this presents itself as a huge opportunity for firms to re-evaluate their supply chain networks in terms of structure, location and configuration. Customer service and operational excellence & efficiencies will drive the future supply chain networks of Indian firms.